New Horizons in International Business series
Chapter 1: Introduction
Many economies in the world are undergoing some form of transition. However in some countries the degree of change has been unprecedented as they are changing from a centrally planned economy to a market-based system. These ‘transition economies’ include countries of the Former Soviet Union (FSU), Central and Eastern Europe (CEE), China, Mongolia and Vietnam. Most of these countries adapted some form of ‘shock therapy’ that included rapid price liberalisation, opening up to international trade, and mass privatisation. Organisations, faced with such radical institutional upheaval, frequently struggled to adapt, leading to sharp drops in countries’ industrial output and dramatic economic decline. Nowhere was this more apparent than in Russia where, in the ﬁrst decade of transition, industrial production dropped more than 50 per cent and the economy contracted by around 60 per cent. In Russia privatisation proceeded rapidly – it took only three years to transfer most state enterprises into private hands. However, two key factors inhibited change inside the organisations at the time: ﬁrst most companies ended up in the hands of ‘insiders’, mainly existing managers, who had no experience in a market economy. Second a relative absence of legal, regulatory and ﬁnancial institutions allowed many managers to pursue their own interests with impunity. In the planned economy, ﬁrms were largely state-owned and had excess employment and inventories, dated physical resources, extensive social services and a non-competitive product portfolio. Managers faced cognitive barriers to understanding the radically changed environment and existing resources lost their value, while ﬁrms lacked resources normally...